To Own or Not to Own. That is the Question.

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Rental Market:

There are two inter-related trends that have impacted the rental market. The first is the rapidly growing number of Americans who cannot afford to buy a home.  These are the millions of, “Generation X and Y”, young adults who do not have the money, credit scores or income to qualify for a home mortgage. Their only options are to rent or live with their parents.

Second, we have increasing number of renters that have lost their homes in the “Great Mortgage Fiasco.”  Hundreds of thousands of families across the nation have been faced with the unseemly choice of giving their house back to the lenders or experiencing the dread of foreclosure.  Those families who have lost their homes make up a new breed of residential renters.  We see them renting the nicer homes; they are people who think like owners, not renters.   Property managers like us have to make allowances for credit scores when screening potential residents. Many of these people have lost their homes may have low credit scores but make great, responsible renters.  Some are couples where one of the wage-earners lost their job and their income was reduced so drastically they could no longer afford the mortgage. They are not a bad credit risk, just people who suffered a string of bad luck.  They will have the pride-of-ownership mentality and want to live in a nice home.  They actually want to take care of the rental as if it were their own home.  These are great renters.

More evidence is mounting that only about half of the foreclosures and REO houses have hit the market yet. That’s correct: as many as 50% of the mortgages that have gone into default have not been foreclosed on and put up for sale. With both home sales and home prices going up, most banks are in no hurry to foreclose; time is on their side.  The demand for rental housing has been increasing and will continue to increase in the months (maybe years) ahead.  We will continue to see a shortage of rental housing, which means rental prices, will continue to increase.

Because of the increasing demand on the rental market, the last few years we have seen rents that are climbing and occupancy rates remaining high. Nationwide rental statistics recently released by Axiometrics Inc. revealed that rental prices rose 5.16% in 2011 and 5.17% in 2012. The single family rental market demand has expanded by 16% since 2007. Axiometrics predicts an additional 1.7 million new renter households between now and 2015.  We are seeing these trends play out in our local business.  As an aggressive property management company, we are seeing average length of  vacancy of only 3 to 5 days.  We also work with seemingly desperate relocation tenants that need to move and are renting homes sight unseen over the phone.  These are professionals who are relocating to take employment in our slowly improving local economy.  They often transition into buyers that purchase a home.

Rent or Buy?

Because of all time low interest rates and home prices that have risen more slowly than rents, buying is now cheaper than renting in many markets. A survey by Trulia.com states that, on average, owning a home is as much as 45% cheaper in the 100 largest U.S. metro areas than renting. We see this every day in the rental homes we manage that are priced under $350,000.  At current mortgage rates the mortgage payment would be less than the monthly rent payment. On homes priced above $350,000 that is not necessarily true: the rental price of the home is less than the mortgage. In Jacksonville, a nice $300,000 home would rent for around $1500 month and if you had 100% financing, one would pay around $1,480 month in mortgage payments. In West Medford, a little 3 bedroom/1 bath cottage would rent for $1,000 a month.  It would sell for $100,000, but the mortgage payment would be about $500 a month.  So owning can cost far less than renting, while also providing tax breaks and possible appreciation benefits.

Lending

Many are surprised to learn that even after the mortgage meltdown there is still a huge range of loan products available, including low- to no-down payment options. There is a USDA rural loan that can be used in most areas of Jackson County, except the cities of Medford and some areas of Central Point.  This loan requires very little to no down payment, and can be used to purchase a home. Another loan from FHA requires less that 4% down.  If you are a veteran there is a great VA loan requiring nothing down. In conjunction with using these low down payment loans, one can also ask for seller credit for most, if not all, of the closing cost.

So, from a purely numbers standpoint, right now it makes more sense to buy rather than rent, except in high-end homes. There are two catches.  First, you have to qualify for a mortgage, which many not be easy for those drowning in credit card debt, student loans or those with credit score below the mid 600’s. Second, you need money for a down payment and closing cost, which, for most, is the difficult part (see the Side Bar for ideas for securing a down payment).  If you can come up with the down payment, have a credit score of mid-600’s or higher, and are currently renting a home valued less than $350,000 you could probably own the home for less!

(Side Bar)

How to Secure the Down Payment

The biggest challenge in buying a home will almost certainly be securing your down payment and closing costs. Whether you are trying to scrape up the 3.5% down for an FHA loan or you are planning to put down a full 20% to avoid paying PMI (principal mortgage insurance), saving for a down payment might be the largest savings endeavor you ever undertake.

But it can be done.  If you look at it as a challenge instead of a slow deprivation-driven chore, you could own a home! Here are some creative ideas for where to find a down payment:

  • Cut Your Budget’s Biggest Line Items. This is where you may spend the most money, and offer the biggest chance for big savings. 
    • Move home or to a less expensive rental
    • Go from two cars to one car
    • Eliminate meals out
    • Cancel your cable TV and put up a digital antenna
  • Eliminate Your Vices.  Some indulgences are expensive.  By eliminating them, you save money.  You might even improve your health.   
    • Stop smoking
    • Drink less alcohol
    • Cook at home rather than dine in restaurants
    • Stop recreational shopping  and curb your impulse spending
    • Make coffee at home and skip expensive coffee shops
  • Sell your stuff.   Your garage is full of valuable stuff that you seldom use.  Clear it out and make some extra cash.  Here are some examples of things you may consider selling:
    • ATV’s, snowmobiles, jet skis, motorcycles, boats, extra cars
    • Clothes, shoes, handbags
    • Supplies and equipment for hobbies you’re no longer interested in
    • Workout equipment that is never used
    • Furniture and antiques
    • Electronics, CD’s, books, TV’s, Computers, old smart phones
  • Rent your stuff for income
    • Sites like www.gettaround.com and www.zimride.com, allow you to rent out your extra seat on a trip, rent your vehicle, your boat, your motorcycle  etc. to earn extra income.
  • Market Your Skills and Time
    • Spend your off time, evenings and weekends leveraging your professional skills or personal hobbies.  Earn extra income by providing technical support, car detailing, bookkeeping, babysitting, sewing, house cleaning, dog walking or whatever you are skilled at.
  • Your Family
    • If you are fortunate enough to have friends or family that can gift you money towards a down payment, this is an allowable source of down payment by the lender.  You can make your case by asking for cash in lieu of gifts for weddings, a new baby, birthday(s) or graduations. This gift may even be tax deductable for the giver.
  • Your Employer (401K)
    • A common way to raise money for a down payment is from you 401K program at work. Many first time home buyers turn to their 401K retirement plans and borrow the money from their own retirement savings to be used as a down payment.  Just talk with your HR department before you act so you know what to expect.

So if you are determined to save money for a down payment to purchase a home, be creative and you can be on your way to becoming a new homeowner.

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